Question

At time zero the spot rate is $1.60 per GBP. Assume that next year the U.S....

At time zero the spot rate is $1.60 per GBP. Assume that next year the U.S. inflation will be 3 %, and British inflation 4%, what is the expected exchange rate at year end?

Answer: $1.5846/GBP

Assume that next year the U.S. inflation will be 3 %, and British inflation 4%. And the British Pound depreciates 7 % over the year. What is the real exchange rate q, at year end?

Answer: ???

Homework Answers

Answer #1
Spot rate 1 GBP = $                    1.60
Inflation in U.S. = 3%
British inflation rate = 4%
Forward rate = 1.60 * (1+0.04)/(1+0.03)
$1.5846
GBP Actual depreciation rate = 7%
If one currency, percentage is adjusted in reverse currency/opposite currency from spot rate.
Spot rate 1 GBP = $                    1.60
Less : Depreciation 7%
Real exchange rate = 1.60 * (1-0.07)= $1.4880
So, real exhange rate is 1GBP = $1.4880.
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The U.S. dollar per British pound spot rate changes from S0(USD/GBP) = USD 1.3786/GBP to S1(USD/GBP)...
The U.S. dollar per British pound spot rate changes from S0(USD/GBP) = USD 1.3786/GBP to S1(USD/GBP) = USD 1.4890/GBP. What is the approximate percentage change in the value of the U.S. dollar?
Assume the one-year interest rate is 12% on British pounds and 9% on U.S. dollars. If...
Assume the one-year interest rate is 12% on British pounds and 9% on U.S. dollars. If the current exchange rate of the pound is $1.63, what is the expected future spot in one year? Suppose a change in expectations causes the expected future spot rate to decline to $1.52. What should happen to the U.S. interest rate?
Assume the spot exchange rate is 106.90 Japanese yen per U.S. dollar. If the inflation rate...
Assume the spot exchange rate is 106.90 Japanese yen per U.S. dollar. If the inflation rate in the U.S. is expected to be 2% and the inflation rate in Japan is 1% for the next two years, then the: exchange rate will increase. exchange rate will double. dollar will appreciate relative to the yen. dollar will become more valuable. Yen will strengthen against the dollar.
A U.S. investor can borrow 1,000,000 or 500,000 GBP. The spot rate is $2.00/GBP, the one...
A U.S. investor can borrow 1,000,000 or 500,000 GBP. The spot rate is $2.00/GBP, the one year forward rate is $2.02/GBP. The U.S. one year interest rate is 14% and the one year British interest rate is 12%. Determine if there is a covered interest rate arbitrage opportunity, and if so, clearly show each step involved in the arbitrage opportunity. Show the total dollar profit. If you determined that there is no arbitrage opportunity, describe why you made that decision.
Assume the following information: Spot rate of £ = $1.60 180-day forward rate of £ =...
Assume the following information: Spot rate of £ = $1.60 180-day forward rate of £ = $1.59 180-day British interest rate = 4% 180-day U.S. interest rate = 3% Based on this information, is covered interest arbitrage by U.S. investors feasible (assuming that U.S. investors use their own funds ($1 million))? Explain.
1. You observe that one U.S. dollar is currently equal to 3.6 Brazilian reals in the...
1. You observe that one U.S. dollar is currently equal to 3.6 Brazilian reals in the spot market.  The one year US interest rate is 7% and the one year Brazilian interest rate is 4%. One year later, you observe that one U.S. dollar is now equal to 3.2 Brazilian reals in the spot market. You would have made a profit if you had: Borrowed U.S. dollars and invested in U.S. dollars Borrowed Brazilian reals and invested in Brazilian reals Borrowed...
(2 pts) Percentage Appreciation. Assume the spot rate of the British pound is $1.242. The expected...
(2 pts) Percentage Appreciation. Assume the spot rate of the British pound is $1.242. The expected spot rate one year from now is assumed to be $1.278. What percentage appreciation does this reflect?              (3 pts) Interest Rate Effects on Exchange Rates. Assume U.S. interest rates fall relative to British interest rates. Other things being equal, how should this affect the (a) U.S. demand for British pounds, (b) supply of pounds for sale, and (c) equilibrium value of the pound?...
Assume the following information: Spot rate of £ = $1.60 180-day forward rate of £ =...
Assume the following information: Spot rate of £ = $1.60 180-day forward rate of £ = $1.56 180-day British interest rate = 4% 180-day U.S. interest rate= 3% (a) Based on this information, is covered interest arbitrage by U.S. investors feasible (assuming that U.S. investors use their own funds)? Explain. (b) Does interest rate parity exist? Explain. (Please provide detailed answers)
The current dollar−pound exchange rate is $2 per British pound. A U.S. basket that costs $100...
The current dollar−pound exchange rate is $2 per British pound. A U.S. basket that costs $100 would cost $140 in the United Kingdom. For the next year, the U.S. Fed is predicted to keep U.S. inflation at 2% and the Bank of England is predicted to keep U.K. inflation at 3%. The speed of convergence to absolute PPP is 15% per year. 1. (Scenario: Monetary Approach in the Long-run) What is the current U.S. real exchange rate with the United...
The current Dollar-Pound exchange rate is 1.60 dollars per British Pound. The U.S. and British risk-free...
The current Dollar-Pound exchange rate is 1.60 dollars per British Pound. The U.S. and British risk-free interest rates (annualized, continuously compounded) are 5% and 7.5%, respectively. Answer the following questions. A. What is the no arbitrage forward price of the British Pound for a 6-month forward contract? B. Suppose the actual forward price is 1.65 dollars per British Pound. Illustrate the arbitrage opportunity.